Is This Gilead Sciences' Most Underappreciated Drug Candidate?

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Shares of the blue chip biotech Gilead Sciences (GILD -0.64%) are currently trading at around 3.8 times the company's projected 2017 revenue. For a top dog like Gilead, with free cash flows in excess of $18 billion per year and a healthy shareholder rewards program in place, the market's present valuation is certainly perplexing. Celgene, for instance, trades at over 6 times its 2017 revenue forecast, and it doesn't even offer a dividend. 

The point of this brief comparison is to illustrate just how little the market is valuing Gilead's clinical pipeline relative to its peers. In fact, I think it's fair to say that the market is giving Gilead's diverse pipeline of experimental treatments for indications such as nonalcoholic steatohepatitis, pulmonary arterial hypertension, and a slew of blood cancers (each of which should be able to command top-dollar) almost no credit whatsoever. However, one drug candidate stands out above all others as the most undervalued.

This early stage blood cancer drug could be a game changer

Of particular note, Gilead owns the commercial rights to the oral Bruton's tyrosine kinase (BTK) inhibitor dubbed ONO/GS-4059 -- indicated for various B-cell malignancies -- after signing a licensing agreement with Japan's Ono Pharmaceutical Co. Ltd. in 2014.

So far, this drug has completed one early stage study where it showed significant clinical activity in advanced forms of chronic lymphocytic leukemia, mantle cell lymphoma, and non-germinal center B-cell diffuse large B-cell lymphoma. Most importantly, Gilead and its partner Ono reported that ONO/GS-4059 was well tolerated in the study, with most adverse events being low-grade events. As a result, Gilead and Ono decided to initiate another early stage study evaluating the drug's long-term safety and efficacy in patients with relapsed or refractory B-cell malignancies.

In addition, the two companies are exploring the drug's ability to be combined with other anti-cancer agents, such as Gilead's PI3K delta inhibitor idelalisib (brand name: Zydelig) to combat blood-based cancers; and Gilead has also launched a small pilot study to assess its utility in inflammatory indications like rheumatoid arthritis. 

Why is this experimental cancer drug a big deal?

AbbVie (ABBV 1.72%) and Johnson & Johnson's (JNJ 0.43%) first-generation BTK inhibitor Imbruvica has proven to be a quantum leap forward for life-threatening blood disorders such as chronic lymphocytic leukemia, mantle cell lymphoma, and Waldenstrom's macroglobulinemia. As such, AbbVie's own internal forecasts suggest that Imbruvica could turn out to be one of the best-selling drugs in the world, with end-user sales possibly reaching upwards of $12 billion.

To be fair, the Street -- and presumably J&J, given that it allowed AbbVie to outbid it for the remaining commercial rights to Imbruvica -- have far less optimistic forecasts for this drug that top out at closer to $6 billion. Regardless, Imbruvica should generate megablockbuster sales figures by all accounts, making it a true franchise-level drug. 

Imbruvica does have its problems, however. For example, the drug has been linked to several serious side effects, such as bleeding, rash, and atrial fibrillation. As a result, AstraZeneca (AZN -0.05%) decided to challenge AbbVie and J&J by acquiring the bulk of privately held Acerta Pharma for its second-generation BTK inhibitor, acalabrutinib, that's billed as potentially being both safer and more potent that Imbruvica. Gilead seems to have the same idea with ONO/GS-4059, implying that its rival BTK inhibitor could eventually steal a significant portion of Imbruvica's market share. 

What's next?

Perhaps the main reason the market isn't showing much love for ONO/GS-4059 is the fact that it still has several years to go in the clinical stage before reaching a regulatory filing. By then, AbbVie and J&J should have been able to tack on additional indications to Imbruvica's label, and Astra will more than likely have entered the space with acalabrutinib. And, of course, the other issue is the possibility that ONO/GS-4059 turns out to be nothing more than a so-called "me, too" drug, instead of a meaningful advancement in the field of BTK inhibitors. 

Consequently, Gilead's primary challenge is how it can differentiate ONO/GS-4059 from its lead competitors, which is going to depend on its toxicity and efficacy profiles. Unfortunately, the biotech hasn't been particularly vocal about this anti-cancer drug since acquiring it from Ono, presumably due to its current stage of development.

Instead, the biotech has attempted to focus the Street's attention on its more advanced oncology therapies like Zydelig, even though this drug has run into its own issues with safety and now appears limited to later lines of treatment. Investors with a long-term outlook, though, shouldn't overlook this key experimental drug hiding amid Gilead's robust pipeline. It could, after all, turn out to be Gilead's next megablockbuster.